Fleites v. MindGeek Contemplates Significant Expansion of Collateral Liability - International Center for Law & Economics
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Fleites v. MindGeek Contemplates Significant Expansion of Collateral Liability

Truth on the Market View Original

In Fleites v. MindGeek—currently before the U.S. District Court for the District of Central California, Southern Division—plaintiffs seek to hold MindGeek subsidiary PornHub liable for alleged instances of human trafficking under the Racketeer Influenced and Corrupt Organizations (RICO) and the Trafficking Victims Protection Reauthorization Act (TVPRA). Writing for the International Center for Law & Economics (ICLE), we have filed a motion for leave to submit an amicus brief regarding whether it is valid to treat co-defendant Visa Inc. as a proper party under principles of collateral liability.

The proposed brief draws on our previous work on the law & economics of collateral liability, and argues that holding Visa liable as a participant under RICO or TVPRA would amount to stretching collateral liability far beyond what is reasonable. Such a move, we posit, would “generate a massive amount of social cost that would outweigh the potential deterrent or compensatory gains sought.”

Collateral liability can make sense when intermediaries are in a position to effectively monitor and control potential harms. That is, it can be appropriate to apply collateral liability to parties who are what is often referred to as a “least cost avoider.” As we write:

In some circumstances it is indeed proper to hold third parties liable even though they are not primary actors directly implicated in wrongdoing. Most significantly, such liability may be appropriate when a collateral actor stands in a relationship to the wrongdoing (or wrongdoers or victims) such that the threat of liability can incentivize it to take action (or refrain from taking action) to prevent or mitigate the wrongdoing. That is to say, collateral liability may be appropriate when the third party has a significant enough degree of control over the primary actors such that its actions can cause them to reduce the risk of harm at reasonable cost. Importantly, however, such liability is appropriate only when direct deterrence is insufficient and/or the third party can prevent harm at lower cost or more effectively than direct enforcement… From an economic perspective, liability should be imposed upon the party or parties best positioned to deter the harms in question, such that the costs of enforcement do not exceed the social gains realized.

The law of negligence under the common law, as well as contributory infringement under copyright law, both help illustrate this principle. Under the common law, collateral actors have a duty in only limited circumstances, when the harms are “reasonably foreseeable” and the actor has special access to particularized information about the victims or the perpetrators, as well as a special ability to control harmful conditions. Under copyright law, collateral liability is similarly limited to circumstances where collateral actors are best positioned to prevent the harm, and the benefits of holding such actors liable exceed the harms.

Neither of these conditions are true in Fleites v. MindGeek: Visa is not the type of collateral actor that has any access to specialized information or the ability to control actual bad actors. Visa, as a card-payment network, simply processes payments. The only tool at the disposal of Visa is a giant sledgehammer: it can foreclose all transactions to particular sites that run over its network. There is no dispute that the vast majority of content hosted on sites like MindGeek is lawful, however awful one may believe pornography to be. Holding card networks liable here would create incentives to avoid processing payments for such sites altogether in order to avoid legal consequences.

The potential costs of the theory of liability asserted here stretch far beyond Visa or this particular case. The plaintiffs’ theory would hold anyone liable who provides services that “allow[] the alleged principal actors to continue to do business.” This would mean that Federal Express, for example, would be liable for continuing to deliver packages to MindGeek’s address or that a waste-management company could be liable for providing custodial services to the building where MindGeek has an office.

According to the plaintiffs, even the mere existence of a newspaper article alleging a company is doing something illegal is sufficient to find that professionals who have provided services to that company “participate” in a conspiracy. This would have ripple effects for professionals from many other industries—from accountants to bankers to insurance—who all would see significantly increased risk of liability.

To read the rest of the brief, see here.